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Guide

6 EFFECTIVE FOREX TRADING STRATEGIES

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Chapters

1

Introduction

Introduction: Why Having an Effective Trading Strategy Is Important

To those on the outside, forex trading looks like a relatively easy way to generate a quick profit. Let us tell you: This is anything but the case. The world of forex can be complex, confusing, and cutthroat at times, with this simply being the truth of the matter. For this reason, you should always carry the correct approach to forex trading, which comes about through adopting an effective trading strategy and implementing it in the right way. The actual trading strategy you adopt will largely come down to your skill level, capital, and attitude to risk. However, no matter which direction you head in when it comes to market approach, the importance of having a strategy is something that should never be understated.

No matter what currencies you actively trade, you are going to be facing a competitive market, which will be filled with constantly changing prices, costs, fees, spreads, and commissions. Having a prior-tested and adaptable trading strategy is crucial for anyone who wants to survive and thrive in the world of forex trading. This is because, through its structure, it should provide you with a set of "rules" to trade by. The modern-day reality is that an unskilled or uneducated trader makes moves at random, something that a trading strategy will actually help prevent.

The statistics within the world of forex speak volumes, as most novice forex traders struggle to gain traction. This failure more often than not comes down to poor preparation and not following an appropriate trading strategy.

1

6 Effective Forex Trading Strategies

Forex trading strategies come in all different shapes and sizes, so before you jump into any of them, we highly recommend you test-drive them first. This can be done through a demo account, which is something that any reputable online broker should provide you with. Testing a forex trading strategy with real capital is something that we must warn against, as it presents an extreme level of risk and could undo any forex trading plans you may have before you even really get started.

With that disclaimer out of the way, it is time to dive into what forex trading strategies are out there, addressing why they're effective and why they are worth exploring.

Forex trading strategies come in all different shapes and sizes, so before you jump into any of them, we highly recommend you test-drive them first.

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2

Range Trading

In terms of simplicity, range trading probably ranks somewhere near the top of the pile. What it constitutes is buying a currency, with the expectation that the valuation will come back towards a longer-term average. The key to making this strategy functional in a live market setting is identifying price points that hover in "bargain" territory. This means identifying a price to enter at where the sellers have held back on closing positions and buyers are likelier to start buying. To do this, you need to look at the levels of support and resistance to get a grasp on what’s what, with this coming about through technical analysis. On top of this, indicators and oscillators can also help you time your market entry when it comes to range trading as well. For reference, this forex trading strategy is also commonly referred to as “mean reversion” and is similar to value investing in many ways.

Range Trading with Bollinger Brands and the Stochastic Oscilator

3

News Trading

Forex news trading is currently experiencing a popularity surge, and there is a good reason as to why that’s the case. This trading strategy, while still analysis-dependent, brings players closer to the actual news and economic developments that drive the forex market in both directions. Every single day, at least seven pieces of important data will be released, so there is plenty for any trader to get stuck into. Those who opt for a forex news trading strategy need to understand that it is based upon predicting market movements on the data released. This, at times, can certainly be a volatile approach to take.

Look for a news event to trade and determine the trend on the H4 chart

As you may already be aware, short-term market movements are common when economic news from both the US and the rest of the world is released. Those looking to trade the news successfully need to have a full grasp on what news releases are most relevant to current economic market conditions, along with when they’ll be released. The potential of forex news trading as a trading strategy is clear, but it does require a trader to navigate volatility, undertake plenty of research, and stay on top of economic news in order to reap the benefits.

We are looking for a counter-trend move so we plot resistance on the 15 or 30 minute chart.

The news is good for the UK and price moves countertrend. Enter a short position, after a clear bounce off resistance, and let the trend continue!

4

Swing Trading

When a trend breaks within the forex market, you’ll find that swing traders usually “get in the game”, as it were. Trends tend to hit a conclusion with a certain degree of price volatility, with a new trend usually waiting in the wings to emerge. What swing traders like to do is become active when the volatility hits, buying and selling while others are simply contemplating movements. Swing trading involves carrying a position for more than 24 hours but not holding it long enough to the point where it bleeds over into trend trading. Should you choose to adopt swing trading, what you do and the moves you make will be based upon a set of trading rules, which will be established through fundamental or technical analysis. These rules (or algorithms) will help you identify when to buy and sell a currency.

Swing trading involves carrying a position for more than 24 hours but not holding it long enough to the point where it bleeds over into trend trading.

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What you'll find is that the algorithm situated at the heart of swing trading doesn't have to be exact in order to predict the peak or valley of a price move. It simply needs the market to move either up or down in order to come into effect. Looking at what risks await those who engage in swing trading, a range-bound or sideways market can prove detrimental.

5

Scalping

As a word within any other aspect of life, scalping brings on negative connotations, but that doesn't apply in the world of forex trading. From a speed perspective, scalping easily ranks as one of the quickest forex trading strategies around. As the name suggests, scalping involves exploiting the price gaps created by order flows and bid/ask spreads. Looking at the nature of scalping, you're really going to have to be on your toes, as you are going to need to be making the spread or buying at the bid price, before selling at the ask price. Out of this, you'll be looking to profit from the difference between the two prices. It's all about moving at speed when it comes to scalping, as positions are only ahead for a short amount of time; risk is also minimised through such means, though, so that is another upside of adopting a scalping-based approach. Those who choose to scalp won’t try to exploit large moves, nor will they trade in large volumes. It’s all about small and often when it comes to scalping.

You need to look at volatile currency pairs and short term time frames to spot scalping opportunities.

The level of profit that scalpers will generate per trade is small, so those adopting such a trading strategy will require liquid markets, as it will allow for increased trade frequency. Unlike swing traders who are looking for a noisy, almost chaotic marketplace, scalpers prefer things to remain on the quiet side, as sudden price movements can really disrupt this way of forex trading.

6

Position Trading

Stepping away from what many deem to be obvious active trading, position trading has links to a "buy and hold" approach to the market. That being said, there is probably a little more to position trading than what immediately meets the eye. Position trading—when done by someone with appropriate knowledge and experience—can be seen as a form of active trading, albeit an alternate variation at that. Position trading means that you are using long-term charts in order to read the markets, with these charts covering time periods ranging from days to months. This is then combined with other trading tools that help determine the way the market is currently moving and set to move in the future. Because of its "long-term" approach, position trading options can last anywhere from several days to several weeks and beyond, dependent on the current trend. Engaging in position trading means looking for successively higher highs or lower lows to determine the trend afoot. Riding the "wave" is key to success, as a trader can benefit from both the dips and peaks of the market.

Take a position on the trend and ride it as long as you can. The stochastic oscillator can show when the trend starts to slow ready for a potential reversal.

Position traders attempt to not determine price levels per se but simply market direction, thus opening the door to jump on a trend after it's in full flow. From there, it's all about timing the exit for when the trend breaks. In terms of difficulty, position trading can be challenging, especially during periods of high market volatility, as potential positions are minimised.

Position trading means that you are using long-term charts in order to read the markets, with these charts covering time periods ranging from days to months.

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7

Day Trading

Day trading is commonly listed as the most active for a trading strategy, to the point where some even refer to it as "active trading". When it comes to day trading, the name implies plenty, as it centres on buying and selling currencies within the same trading day. There is a "get in, get out" backbone to day trading, as positions are closed out during the same day in which they are adopted. Generally speaking, day trading qualifies as an advanced trading method, with it traditionally being adopted by professional traders, market makers, and investment specialists. For novice traders, this probably isn't going to be a strategy that you are going to want to jump headfirst into, so education is key here, as the general pace and feel of this forex trading strategy aren’t going to be for the faint of heart.

Day trading is all about multiple views so you can spot the most opportunities to trade each day.

8

The Importance of Maintaining a Consistent Strategy

What the above has detailed is a selection of the most popular forex trading strategies that are actively being used by traders. Each has its own positives and negatives, so it's generally a case of trader circumstance and discretion when it comes to deciding which is used. That said, it's worth remembering that no matter the forex trading strategy adopted, consistency remains key when it comes to getting the absolute best out of it. The biggest mistake that traders make is going against their strategy or rapidly switching between strategies on the fly. This lack of concentration and focus can have disastrous effects, as it opens the door to losses that can occur during the time period in which you are switching strategies, while there is also every chance that you’ll pull away from a strategy right before it yields a profit.

Now, we aren't saying that certain trading strategies aren’t best suited to certain market environments, as that can, at times, be the case. But by chopping and changing through various strategies, all you are really doing is looking for a quick fix, which is never going to lead to forex trading success over the long term. Patience is key, so it's important to remain consistent in the trading strategy you choose to adopt. It may take weeks (possibly even months) to really come into its own, but by remaining focused on a single strategy, the benefits of it will eventually come around.

The biggest mistake that traders make is going against their strategy or rapidly switching between strategies on the fly.

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Forex trading is far and away one of the most exciting ways to invest capital. Through this guide, we have addressed and detailed some of the most popular forex trading strategies around, all of which have proven their effectiveness. For that reason, it's certainly worth looking to see if they're suitable for your current forex trading circumstances.

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